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THE ADMINISTRATIVE PROVISIONS OF THE REVENUE ACT OF 1913 l SUMMARY The great use of ad valorem duties in the act, 31. — Action of House and Senate, 33. — Consigned and assembled shipments, 33. — Forms of declaration at Secretary's discretion, 34. — Better statistical returns, 34. — Penalties strengthened, 35. — Some hardship for importers obviated, 36. — Ascertainment of foreign value, 38. — Protest fees required; contingent attorney fees prohibited, 38. — Character of hearings before General Appraisers, 40. — Fictitious oases by domestic manufacturers prevented, 41. — Penalties, 42. — Burden of proof in suits for value, 43. — Provisions on examination of books of foreigners and importers, 44. — Conclusion, 45. One of the most striking features of the new tariff is the wholesale adoption of the ad valorem method of assessing duties. Much may be said upon each side of the question of the rival merits of the ad valorem and the specific bases for levying duties; and Secre- taries of the Treasury have differed fundamentally upon this question. But there can be little discussion upon the relative difficulties of administration of the two, or upon the ease with which frauds may be prac- tised upon the revenue. The ad valorem method throws far greater difficulties in the path of the Treasury Department, both at the custom houses and abroad, and also immeasurably increases the opportunities, temptations, and facilities for fraud upon the part of the importer. As was aptly said by one of the ambassa- 1 The revenue act of 1913 is entitled " An Act to reduce tariff duties and to provide revenue for the government, and for other purposes." Section I fixes the tariff duties. Section II levies the income tax. Section III, the one here under consideration, settles the administrative details of the tariff. Its paragraphs are listed under capital letters, A, B, C, D, and so on. Section IV contains miscellaneous provisions, — on trade agreements (quite innocuous); modifications affecting Cuba, the Philippines, and Porto Rico; drawback arrangements; and so on, in considerable number. 31 32 QUARTERLY JOURNAL OF ECONOMICS dors at Washington from a foreign country where the specific method has been adopted; " We think our collectors can tell a pair of shoes from a grand piano very readily" : and he might have added, "and from a gallon of whiskey, or a ton of coal, or a yard of cloth, and can count, gage, weigh, or measure them with ease and exactness." On the other hand, it is no simple matter for an appraiser in Cleveland, let us say, to ascertain with entire accuracy the exact value of a bale of wool in Afghanistan upon a day months past (the day of ship- ment); which is the job that is required of him under the ad valorem system. And this job, the Underwood Act has increased to a somewhat terrifying extent. For example, Schedule A, comprising chemicals, oils and paints, included eighty-three paragraphs in the tariff of 1909, of which fifty-eight were specific, eleven ad valorem, and fourteen both specific and ad valorem. The same Schedule in the act of 1913 includes seventy-one paragraphs, of which only twenty-two are specific, thirty-two being ad valorem and sixteen being both specific and ad valorem. And this illustration is typical of the whole measure. Now it early became obvious to Mr. Underwood and his associates that the proper protection and collection of the revenues upon the ad valorem basis would require a clothing of the collecting force with all the powers necessary to prevent and punish frauds in undervalua- tion. As a natural consequence the administrative sections, which found their origin in the Customs Administrative Act of 1890, amended in some partic- ulars by the Dingley act of 1897, and the Payne act of 1909, were gone over with the utmost care in order that the weak places might be strengthened and the powers of the government to get at the truth in matters of valuation might be made clear and summary. ADMINISTRATIVE PROVISIONS OF 1913 33 Altho the Sub-Committee of the Senate, influenced to a large extent by a committee purporting to repre- sent the sentiments of the Merchants Association of New York, apparently became imbued with the idea that a " conspiracy " existed to defeat the object of the lowered duties by harsh administrative provisions, and eliminated a larger number of the reforms found therein, a substantial number have been restored by the conferees and now appear in the law. The first of these changes is found in paragraphs C and D of Section III. This amendment requires that there shall be included within the general description of " purchased " merchandise, all articles concerning which " agreements for purchase " have been made, altho title has not actually passed. The purpose of this change undoubtedly was and its effect will be, to prevent the importation, upon a "consigned" form of invoice, of merchandise which has actually been made the subject of a bargain and sale. Thus the appraising officer will have the benefit of an intimate knowledge of the real transaction concerning the goods imported, a knowledge which in many instances he had been prevented from obtaining under the old law. Paragraph D also contains an amendment requiring the consulating of an invoice in the consular district where the merchandise is assembled for shipment, in cases where purchases are made in more than one district. This will obviously tend to avoid the present uncertainties as to the correct procedure in such cases and will benefit both the shipper and the government. It may be noted at this point that a later paragraph (X) amplifies the provision on assembled merchandise, by requiring that such invoices shall have attached thereto the original bills, invoices, or statements, 34 QUARTERLY JOURNAL OF ECONOMICS showing the prices or expenses of each purchase or consignment. This will add materially to the labor required of the shipper of assembled merchandise, but it will only give the appraisers the amount of informa- tion to which they have always been entitled, but which they have been unable to get in many instances. The next important change is found in paragraph F, which abolishes the four rigid statutory forms for declarations which have heretofore been mandatory. In their stead is a provision that the declaration accom- panying the entry shall be upon a form "to be pre- scribed by the Secretary of the Treasury according to the nature of the case." This amendment will give flexibility to the requirements for declarations and will permit the Secretary to provide proper forms to cover the constantly changing conditions of business, and will require the importer to make a declaration true both in letter and spirit, — a requirement that is today not always possible of fulfilment. There is added to the paragraph also an authorization to the Secretaries of the Treasury and Commerce to establish lists of imported articles for statistical pur- poses, which must be used in making out the declara- tions upon entry; and it is made the duty of the consular officers to require such statistical information to be furnished at the time of consultation of the invoice. This reform is undoubtedly the result of the efforts of a joint committee of the Departments of the Treasury and of Commerce and Labor which had been at work for more than a year during the last administration upon the problem of improving our statistical returns of imports and exports. While it will require some additional clerical labor on the part of the foreign shippers and our own importers, it will be of consider- able value in augmenting the accuracy of our statistics, hitherto woefully lacking in that regard. ADMINISTRATIVE PROVISIONS OF 1913 35 Paragraphs G and H, which provide the penalties, criminal and civil, for fraudulent entries, replace subsections 6 and 9 of Section 28 of the Payne act. Each paragraph has been strengthened in order to bring within its terms various fraudulent acts of importers which have heretofore escaped without penalty, owing to loopholes or weaknesses in the exist- ing laws. The changes are aimed principally at the practice, so common hitherto, of having the entry and the declaration made by an office boy or an agent or broker, acting for the importer, from whom all knowl- edge concerning the facts of the transaction is carefully kept. Under the old law it was practically impossible for the government to fix the liability for frauds thus accomplished; now the person who makes the entry and every person who aids or procures its making will be held strictly accountable for the truth of the facts therein recited. In other words, the new law has real teeth, to take the place of sham ones that had been filed away by court decisions. Importers and their agents would do well to study the provisions of these paragraphs before making entry, for while they do not require anything more than the exact truth, they do require this, without equivocation. Incidentally there is an added proviso which will prevent what are called " general order " goods from retaining the immunity from forfeiture which they now apparently enjoy. That is, merchandise which has been shipped from abroad accompanied by a false invoice, but of which no entry has been made at the port of arrival, will be held to be the subject of an attempt to enter by fraud, and consequently liable to the ordinary forfeiture provisions. Under the old law (unless a case now on appeal in the Supreme Court should be reversed) an importer whose fraud was discovered prior to the arrival of the goods, 36 QUARTERLY JOURNAL OF ECONOMICS could escape all consequences by merely letting them go, without formal entry, to the " general order " warehouse. Two changes are made in Paragraph I. The first is of no real importance, — an insertion to the effect that an importer may make an addition or deduction to or from the invoice value of his merchandise at the time of making entry " but not after either the invoice or the merchandise has come under the observation of the appraiser." The change in language from the act of 1909 is slight, and in practical administration will be nil, as a practice had grown up under the rulings of the Treasury Department by which the language of the Payne law was construed to mean exactly what is now inserted in the Underwood bill. A very substantial amendment, however, made in conference, provides that an importer may, by direction of the Secretary of the Treasury, have his duty assessed upon an amount less than the entered value, provided that the importer certifies at the time of entry that the entered value is higher than the foreign market value, and that the goods are so entered in order to meet advances by the appraiser in similar cases then pending upon an appeal for re-ap- praisement, and provided further that the importer's contention shall be sustained by final decision upon such re-appraisement, and it shall appear that his action was taken in good faith after due diligence and inquiry upon his part. The Secretary is also required to accompany his directions with a statement of his conclusions and his reasons therefor. Undoubtedly this provision will prevent the hardship under which a few importers were placed by the pro- visions of the Payne law in cases where they have had an honest disagreement with the appraiser's officers as to the true value of the imported merchandise. ADMINISTRATIVE PROVISIONS OF 1913 37 Under the Payne law (which is copied exactly in this section of the Underwood bill, with the above proviso added) if an entry is made at too low a valuation, and is raised by the appraiser and sustained by the general appraisers upon appeal, the importer must not only pay the increased duty to be assessed upon the higher valuation but also an additional duty of 1 per cent for every 1 per cent of undervaluation, not exceeding 75 per cent in all. This general provision was and is necessary for the adequate protection of the revenues against under-valuations. On the other hand, there is a further provision that duty in no case shall be assessed upon a value less than the entered value. The result of the two is that while the case is on appeal before the Board of General Appraisers the importer who brings in more merchandise of the same character is literally between the devil and the deep sea. If he enters his merchandise at the lower value which he claims is correct, and his contention is finally held invalid, all his entries are liable to both the increased and the additional duties described above. On the other hand, if he makes an entry at the valuation claimed by the appraisers, and their contention is finally held in- valid, he can get no rebate but must pay with respect to all the entries upon a value not less than the entered value. In attempting to relieve the harshness of this situation Congress has thrown upon the Secretary of the Treasury a responsibility which in a modified form has been tried before and abandoned, and which will very likely lead to many charges of favoritism and undue influence. It will tend to encourage every importer to place a low valuation upon his merchandise, contest by appeal all such increases as may be made by the local appraisers, file the required certificate of good faith and due diligence, and hurry to the Secretary of 38 QUARTERLY JOURNAL OF ECONOMICS the Treasury with a request that all his merchandise be allowed entry at the lower rate. Should that rate in the test case be sustained, the Secretary, or rather the Assistant Secretary in charge of the customs (for upon his shoulders will fall the burden of this Section) will then have to decide as to the good faith and general merits of the claims put forward by a number of impor- ters, altho he is without adequate machinery or time to hold hearings under oath in this regard. The amend- ment undoubtedly will cure the evil that sometimes but not very frequently occurs. Whether or not it will plunge the Treasury Department into worse evils is a question which cannot be answered without an actual experience of its administration. The next change appears in paragraph L, which is the paragraph authorizing appraisers in cases where mer- chandise is not actually sold or freely offered for sale in the open market of the country of exportation to ascertain the foreign market value by deducting from the actual selling price in the United States, the esti- mated duties, cost of transportation, insurance, and other necessary expenses, a commission not exceeding 6 per cent, and profits not to exceed 8 per cent, and a reasonable allowance for general expenses not to exceed 8 per cent. The Payne law allowed a maximum of 8 per cent for both profits and general expenses. The Underwood bill is more liberal to the importer in this regard and allows a maximum of 8 per cent for each. Paragraphs M and N, relating to the duties of the appraiser and the general appraisers in re-appraisement cases, have been altered in a number of particulars. An important change is that requiring a fee of one dollar for carrying an appeal for re-appraisement to the Board of General Appraisers. The House Bill had provided that this fee should be payable " with respect to each ADMINISTRATIVE PROVISIONS OF 1913 39 appraisement objected to." This was stricken out by the Senate and in conference a compromise was reached to the effect that the fee should be " for each entry." While this is an improvement upon the old law, under which importers might appeal for re-appraisement to their heart's content without cost to themselves, it is not so effective as the House proposal, in view of the fact that some invoices and entries cover hundreds of sheets of paper and include thousands of items, all of which may have different values and classifications. The same criticism may be made of paragraph N, where the House provision limiting each protest to a single article or class of articles and to a single entry or pay- ment was stricken out by the Senate. It is not reason- able that an importer who makes an entry of one article of merchandise should be called upon to pay the same fee for appealing for re-appraisement or re-classification as an importer who appeals with respect to several hundred articles of merchandise which happen to be included in one invoice and entry. The requirement of a protest fee is a reform urged for years by the Treasury Department during all the recent administrations; it was recommended by the Denison Committee and also by the Appraisement Commission appointed by Secretary MacVeagh; and it was also recommended by most of the members of the Board of General Appraisers. The experts in the customs service confidently expect that the enormous mass of customs litigation will be more than cut in half, and that the dockets of the Board of General Appraisers, heretofore clogged with over one hundred thousand protests per year, will now be filled with only bona fide cases brought to test some real issue between the importer and the government. 40 QUARTERLY JOURNAL OF ECONOMICS A second new provision bitterly opposed by customs attorneys and brokers is that " no agreement for a contingent fee in respect to recovery or refund under protest shall be lawful," and "compliance with this pro- vision shall be a condition precedent to the validity of the protest and to any refund thereunder," and further that "a violation of the provision shall be punish- able by a fine not exceeding $500, or imprisonment of not more than one year, or both." This change was also urged by the Denison Committee, and was sub- mitted to the Finance Committee of the Senate by Assistant Attorney Denison and by the present writer, with the approval of Secretary McAdoo. It is aimed at a grave abuse, amounting in the opinion of many to a scandal, caused by the general practice prevalent today of customs attorneys and brokers taking cases for importers upon a 50 per cent contingent fee basis. The practice has led not only to the fomenting of litiga- tion, but also (since the longer the litigation is dragged out, the better it is for the lawyer, but worse for the importer) to a situation in which the interests of the attorney and his client were diametrically opposed in the matter of pressing the case to a final conclusion. Paragraph M has been further amended so as to eliminate closed hearings before the Board of General Appraisers. At all such hearings the parties or their attorneys shall have opportunity to introduce evidence and to hear and cross-examine the witnesses for the other parties, and to inspect all samples and all docu- mentary evidence offered. This provision by itself would indicate that the procedure to be adopted by the Board of General Appraisers would be approxi- mately that of a Court or Judicial Tribunal; but it is also provided that evidence of persons whose attendance cannot be procured may be admitted in the discretion ADMINISTRATIVE PROVISIONS OF 1918 41 of the Board and that the Board is authorized to exer- cise both judicial and inquisitorial functions. The provisions of the bill as it passed the House indicated clearly that the Board was expected to be an appellate tribunal for appraisements, exercising independent and inquisitorial means of its own for ascertaining values. The House had adopted the theory, which has been heretofore followed, and which was urged in the report of the President's Committee (composed of Messrs. Denison, Loeb and Frankfurter) to investigate the Board of General Appraisers, that any appellate tri- bunal on appraisement matters should add to the stock of knowledge and evidential facts concerning values. The paragraph as it came from the Senate indicated an intention to turn the Board into a judicial body. The result reached in conference is obviously a compromise. The Board is clothed with some powers like those of a court, but is still authorized to exercise inquisitorial functions like a local appraiser or other administrative officer. The net result will probably be that the hear- ings before the Board will be conducted in the future much as they have been in the past. Another amendment (in paragraph N) is aimed to overcome the decisions of the Court of Customs Appeals in the Schwartz case, in which it was held that a domestic manufacturer who desired more protection for his product than the government was assessing, might import similar articles and protest because the rate or amount of duty assessed upon his merchandise was too low. The effect of this decision was to encour- age fictitious litigation, which will be prevented by the new language authorizing the filing of a protest if the importer is dissatisfied with a decision " imposing a higher rate of duty or a greater charge than he should claim to be legally payable." 42 QUARTERLY JOURNAL OF ECONOMICS Importers should not feel, however, that the whole of these paragraphs has been turned against them, for there is one provision more favorable than the similar one in the old law, that relating to the time within which a protest must be filed. This period has been extended from fifteen days to thirty days after the final liquida- tion of the entry: and it should be noted that the " iniquitous " protest fee need not be paid for thirty days more, — a total of sixty days within which the importer may decide whether he desires to litigate with the Government or not. This period should easily suffice for all bona fide cases. Paragraph O has been amended to meet a court decision to the effect that collectors and appraisers were not entitled to examine importers and other per- sons regarding merchandise not directly before them for consideration and action. The new law provides that the officers may make such inquiries respecting goods " then under consideration or previously im- ported within one year." This change is clearly in line with the policy of strengthening the powers of the government wherever experience has shown such action to be necessary. There is also a slight amend- ment to make certain that the testimony of persons taken by the collector or appraiser in advance of the formal hearing shall be given consideration in subse- quent proceedings. While this was probably the intent of the old law, the language was not entirely free from ambiguity. The provision is especially useful in obtaining the evidence of masters and crews of vessels or other persons, whose later attendance at any given place in this country is difficult to obtain. The next paragraph (P) specifies the penalties for a refusal to attend when summoned, or to answer the authorized interrogatories. ADMINISTRATIVE PROVISIONS OF 1913 43 The changes here are two. The first substitutes a fine upon the recalcitrant witness varying from $20 to $500, for the former flat amount of $100. The second, more important, provides for the recovery by the govern- ment of the value of the merchandise in question from the witness if he is the owner, importer or consignee. The old law had provided only for forfeiture in such cases, and had not authorized a suit for value in in- stances where the merchandise might escape forfeiture by having actually entered into consumption. Slight alterations in language appear in paragraph Q, making clear the intent of Congress that the Secretary of the Treasury and the Board of General Appraisers are to have joint control over the publication of the decisions of the Board, either in full or by means of abstracts. A more significant change, however, is found in a new phrase requiring the Board to insert in its decisions " a statement of facts upon which the decision is based." This amendment will not affect classification cases at all, as the present practice of the Board is to include such a statement; but it will make a vital change (and greatly for the better in the opinion of the writer) in all re-appraisement cases. Heretofore, the General Appraisers, in reporting such cases, have not stated the facts which led to their decisions. In consequence the decisions were almost never of benefit in assisting either the local appraisers or the importers in arriving at correct values for later importations of similar merchandise. Another amendment, somewhat similar to that found in paragraph P, appears in paragraph T, whereby the burden of proof is thrown upon the defendant in suits for value, just as the burden is already upon him in forfeiture cases. The only difference between the two types of proceedings is that in one the merchandise is 44 QUARTERLY JOURNAL OF ECONOMICS actually seized, whereas in the other it has escaped seizure by having entered into consumption. As recovery by the government in each class of case is predicated upon fraud, it seems entirely proper that the defendant who has been astute enough to get his goods away from the clutches of the Customs officers should not thereby be placed in any better position than a brother importer who has not had that good fortune. Paragraph U is one of the new provisions, originating in the House bill, that caused much adverse comment both in this country and abroad. In its original form it authorized the Secretary of the Treasury to exclude from entry merchandise sold or shipped by foreigners who declined to submit their books pertaining to values or classifications to a duly accredited officer of this country. The Senate struck out the paragraph (which was wholly new) in its entirety. In conference a substitute was adopted authorizing the Secretary to levy an additional duty of 15 per cent upon all such merchandise, with a proviso, however, that such addi- tional duties shall not be imposed upon merchandise from foreign countries where there exists legal machin- ery for punishing false swearing upon invoices or statements of costs in connection with the consular certification thereof. As thus enacted the paragraph gives the Secretary a power (altho not a very extensive one) which he will certainly need if the ad valorem system is not to break down of its own weight. It will also tend to hasten the day when adequate penal- ties for perjury committed abroad with reference to exported merchandise can be inflicted upon the guilty parties. At the present time there are very few coun- tries where such is the case (possibly one or two in all). Paragraph V, as framed in the House, provided for the same penalty of exclusion for the merchandise of ADMINISTRATIVE PROVISIONS OF 1913 45 importers in this country who refused to open their books. This also was stricken out by the Senate, and finally modified in conference to a penalty of 15 per cent to be imposed at the discretion of the Secretary. To conclude, the new law is clearly designed to protect the government and assist its officers in collect- ing the revenues justly due. The burdens imposed upon the honest importer who desires to comply with both the spirit and the letter of the law have not been greatly increased. It is true that he must make a statistical list of his imports, but the forms will be prepared for him by the Department, and the task should prove little if at all more exacting than the present requirement that every invoice shall contain an accurate detailed description of the merchandise covered. True, also, he will have to take far greater pains to make sure that his entries are made and verified by a person with actual personal knowledge of the facts therein recited. Under the old system, such entries were ordinarily made by a subordinate who, to quote the report of the Appraisement Commission " supports the integrity of the invoice by his declaration to the best of his knowledge and belief, without having the faintest semblance of knowledge or the frailest founda- tion for belief." This situation cannot exist under the new law unless both the principal and his agent are prepared to assume severe liabilities in case im- proper entries are made. Drastic provisions and heavy burdens, however, are prepared for the dishonest importer, who will be made to feel much more keenly than has heretofore been the case that the law is meant to be obeyed and not to be trifled with. James F. Cuetis. Boston, Mass.